CREDIT RATING AGENCIES - ECONOMY
News: Rating
agencies too subjective, loaded against India, need reform: CEA
What's in the news?
● Calling
for urgent reforms and transparency in the process of sovereign credit rating,
the office of the Chief Economic Advisor in the Union Ministry of Finance, has
said that methodologies used by agencies Fitch, Moody’s and S&P, are
heavily loaded against developing countries like India due to an
“over-reliance” on non-transparent and subjective qualitative factors.
Credit Rating:
● A
credit rating is an assessment of the
creditworthiness of a borrower in general terms or with respect to a
particular debt or financial obligation.
Assigned to:
● A
credit rating can be assigned to any entity that seeks to borrow money — an individual, corporation, state or
provincial authority, or sovereign government.
Credit Rating Agencies:
● A
credit rating agency (CRA) is a company that assigns credit ratings, which rate
a debtor’s ability to pay back debt by making timely principal and interest
payments and the likelihood of default.
Functions of CRA:
● Credit
rating agencies give investors information about bond and debt instrument
issuers.
● Agencies
provide information about country’s sovereign debt.
CRA’s in India:
● Currently
there are seven registered CRA’s in India viz. CRISIL, CARE. ICRA, SMREA,
Brickwork rating, India rating and research Pvt. Ltd.
● They
were recognised by SEBI.
Global Credit Rating Industry:
● It
is highly concentrated, with three leading agencies viz. Moody’s, Standard & Poor’s, and Fitch.
Different Credit Rating Scales:
● Credit
ratings use alphabetical symbols (AAA,
AA, A, B, etc.) to assess the creditworthiness of corporate financial
instruments.
● Higher
ratings suggest a lower risk of default, with AAA being highly favourable,
indicating strong financial capability.
● Ratings
below BB are considered indicative of poor creditworthiness.
Regulations:
● In
India, the Securities and Exchange Board of India (SEBI) primarily regulates
credit rating agencies and their functioning according to SEBI Regulations,
1999 of the SEBI Act, 1992.
● The SEBI (Credit Rating
Agencies) Regulations, 1999 provide for a
disclosure-based regulatory regime, where the agencies are required to disclose
their rating criteria, methodology, default recognition policy, and guidelines
on dealing with conflict of interest.